Ambac Files for Chapter 11

By

Erik Holm And

Eric Morath

Updated Nov. 9, 2010 12:01 am ET

Ambac Financial Group Inc. filed for Chapter 11 bankruptcy protection after the Internal Revenue Service questioned the accounting that allowed the bond insurer to receive more than $700 million in tax refunds.

Ambac had already been warning investors that it could face bankruptcy when the IRS contacted the company in late October. But it was the inquiry from the IRS, and the possibility that the IRS could place a lien on the firm to recover the refund, along with a failure to reach an agreement with some of its senior debt...